Chapter 1 Accounting and the Business Environment Demonstration Problems © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Future Enterprise's balance sheet data at May 31, 2016, and June 30, 2016, follow: Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 For each of the following situations with regard to common stock and dividends of a corporation, compute the amount of net income or net loss during June 2016. a. The company issued $20,000 of common stock and paid no dividends. b. The company issued no common stock. It paid cash dividends of $15,000. c. The company issued $18,000 of common stock and paid cash dividends of $25,000. © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 20,000 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 20,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 20,000 Less: Dividends Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 20,000 75,000 ($75,000 + $0) Less: Dividends Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 a. The company issued $20,000 of common stock and paid no dividends. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 20,000 Net income for the month 5,000 ($75,000 − $40,000 − $20,000) 75,000 ($75,000 + $0) Less: Dividends Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock Less: Dividends 15,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 90,000 ($75,000 + $15,000) Less: Dividends 15,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 b. The company issued no common stock. It paid cash dividends of $15,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock Net income for the month 50,000 ($90,000 − $40,000) 90,000 ($75,000 + $15,000) Less: Dividends 15,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 18,000 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 18,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 18,000 Less: Dividends 25,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 18,000 100,000 ($75,000 + $25,000) Less: Dividends 25,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-21 Total assets May 31, 2016 $ 160,000 June 30, 2016 $ 225,000 Total liabilities 120,000 150,000 c. The company issued $18,000 of common stock and paid cash dividends of $25,000. Stockholders’ equity, May 31, 2016 $40,000 ($160,000 − $120,000) Add: Issuance of common stock 18,000 Net income for the month 42,000 ($100,000 − $40,000 −$18,000) 100,000 ($75,000 + $25,000) Less: Dividends 25,000 Stockholders’ equity, June 30, 2016 $75,000 ($225,000 − $150,000) © 2016 Pearson Education, Inc.

Demonstration of E1-31, E1-32, & E1-33 The account balances of Louis Computer Service at March 31, 2016, follow: Equipment $18,000 Service Revenue $ 13,500 Office Supplies 900 Accounts Receivable 7,600 Notes Payable 8,000 Accounts Payable 3,500 Rent Expense 700 Common Stock 3,000 Cash 2,500 Salaries Expense 2,000 Dividends 1,300 Retained Earnings, Mar. 1, 2016 Requirements E1-31. Prepare the income statement for the month ending March 31, 2016. E1-32. Prepare the statement of retained earnings for the month ending March 31, 2016. E1-33. Prepare the balance sheet as of March 31, 2016. © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-31 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2016 Service Revenue $13,500   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-31 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2016 Service Revenue $13,500 Expenses: Salaries Expense $2,000   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-31 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2016 Service Revenue $13,500 Expenses: Salaries Expense $2,000 Rent Expense 700   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-31 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2016 Service Revenue $13,500 Expenses: Salaries Expense $2,000 Rent Expense 700 Total Expenses 2,700   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-31 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2016 Service Revenue $13,500 Expenses: Salaries Expense $2,000 Rent Expense 700 Total Expenses 2,700 Net Income $10,800   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Statement of Retained Earnings Demonstration of E1-32 Retained Earnings, Mar. 1, 2016 $2,000 Net Income 10,800 Dividends 1,300 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2016 Retained Earnings, Mar. 1, 2016 $2,000   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Statement of Retained Earnings Demonstration of E1-32 Retained Earnings, Mar. 1, 2016 $2,000 Net Income 10,800 Dividends 1,300 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2016 Retained Earnings, Mar. 1, 2016 $2,000 Net income for the month 10,800   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Statement of Retained Earnings Demonstration of E1-32 Retained Earnings, Mar. 1, 2016 $2,000 Net Income 10,800 Dividends 1,300 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2016 Retained Earnings, Mar. 1, 2016 $2,000 Net income for the month 10,800   12,800 © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Statement of Retained Earnings Demonstration of E1-32 Retained Earnings, Mar. 1, 2016 $2,000 Net Income 10,800 Dividends 1,300 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2016 Retained Earnings, Mar. 1, 2016 $2,000 Net income for the month 10,800   12,800 Less: Dividends 1,300 © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Statement of Retained Earnings Demonstration of E1-32 Retained Earnings, Mar. 1, 2016 $2,000 Net Income 10,800 Dividends 1,300 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2016 Retained Earnings, Mar. 1, 2016 $2,000 Net income for the month 10,800   12,800 Less: Dividends 1,300 Retained Earnings, Mar. 31, 2016 $11,500 © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Stockholders’ Equity © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Stockholders’ Equity © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Office Supplies 900 Stockholders’ Equity © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Office Supplies 900 Equipment 18,000 Stockholders’ Equity   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Office Supplies 900 Equipment 18,000 Stockholders’ Equity   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Equipment 18,000 Stockholders’ Equity © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Total Liabilities 11,500 Equipment 18,000 Stockholders’ Equity © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Total Liabilities 11,500 Equipment 18,000 Stockholders’ Equity Common Stock 6,000   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Total Liabilities 11,500 Equipment 18,000 Stockholders’ Equity Common Stock 6,000 Retained Earnings © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Total Liabilities 11,500 Equipment 18,000 Stockholders’ Equity Common Stock 6,000 Retained Earnings Total Stockholders’ Equity 17,500   © 2016 Pearson Education, Inc.

LOUIS COMPUTER SERVICE Demonstration of E1-33 Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Notes Payable 8,000 Office Supplies 900 Retained Earnings, Mar. 31, 2016 11,500 Equipment 18,000 Common Stock 6,000 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2016 Assets Liabilities Cash $2,500 Accounts Payable $3,500 Accounts Receivable 7,600 Note Payable 8,000 Office Supplies 900 Total Liabilities 11,500 Equipment 18,000 Stockholders’ Equity Common Stock 6,000 Retained Earnings Total Stockholders’ Equity 17,500 Total Assets $29,000 Total Liabilities and Stockholders’ Equity   © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Star Motor Service had net income for the year of $30,000. In addition, the balance sheet reports the following balances: Jan. 1, 2016 Dec. 31, 2016 Notes Payable $28,000 $35,000 Cash 10,000 22,000 Office Furniture 25,000 30,000 Building 100,000 Accounts Payable 8,000 6,000 Total Stockholders’ Equity 130,000 160,000 Accounts Receivable 2,000 12,000 Equipment 35,000 Office Supplies 4,000 Calculate the return on assets (ROA) for Star Motor Service for the year ending December 31, 2016. © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Jan. 1, 2016 Dec. 31, 2016 Cash $10,000 $22,000 Accounts Receivable 2,000 12,000 Office Supplies 4,000 Equipment 25,000 35,000 Office Furniture 30,000 Building 100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Jan.1, 2016 Dec.31, 2016 Cash $10,000 $22,000 Accounts Receivable 2,000 12,000 Office Supplies 4,000 Equipment 25,000 35,000 Office Furniture 30,000 Building 100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2 Beginning total assets ═ $10,000 + $2,000 + $4,000 + $25,000 + $25,000 + $100,000 ═ $166,000 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Jan.1, 2016 Dec.31, 2016 Cash $10,000 $22,000 Accounts Receivable 2,000 12,000 Office Supplies 4,000 Equipment 25,000 35,000 Office Furniture 30,000 Building 100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2 Beginning total assets ═ $10,000 + $2,000 + $4,000 + $25,000 + $25,000 + $100,000 ═ $166,000 Ending total assets ═ $22,000 + $12,000 + $2,000 + $35,000 + $30,000 + $100,000 ═ $201,000 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Beginning total assets $166,000 Ending total assets $201,000 Average Total Assets ═ (Beginning total assets + ending total assets) / 2 ═ $166,000 + $201,000 ∕ 2 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Beginning total assets $166,000 Ending total assets $201,000 Average Total Assets ═ (Beginning total assets + ending total assets) / 2 ═ $166,000 + $201,000 ∕ 2 ═ $183,500 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Net income $30,000 Average total assets $183,500 Return on Assets ═ Net income Average total assets © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Net income $30,000 Average total assets $183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Net income $30,000 Average total assets $183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500 ═ 0.163 © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. Demonstration of E1-39 Net income $30,000 Average total assets $183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500 ═ 0.163 ═ 1.63% © 2016 Pearson Education, Inc.

© 2016 Pearson Education, Inc. End of Chapter 1 © 2016 Pearson Education, Inc.